A business credit score is a measurement (a value/number) that is used to determine whether a business is managing its finances well, and to ascertain if it is a good borrower or not. The score is the result of a mathematical algorithm based on data gathered about the business’s financial history. It includes information about the business’s regular payment behaviour and its repayment (or non-repayment) of debts.
Not all credit bureaux in South Africa collect business credit data. The six primary credit bureaux were established as consumer credit bureaux, meaning they were set up to collect and share data on individuals, not businesses. As such, they have very little credit data on businesses. Where business credit data does exist, it is sparse, is costed at a premium, and pertains primarily to larger, more established businesses (i.e. with turnovers of more than R10 million per annum) who have previously secured credit, as opposed to micro and small businesses (i.e. businesses with a turnover of R0 to R10 million per annum). While the credit bureaux will provide a business credit report, the majority are thin files, meaning they do not contain sufficient information for a bank or lender to use in their credit scoring model.
In South Africa, all of the lenders that provide business finance rely on the owner’s personal credit score to determine the credit worthiness of the business they own. They see the owner’s personal credit report as a proxy for the business, meaning that if the owner has a bad credit score and manages their personal finance poorly, the lender assumes the same is the case for the business. The Inaugural SA SMME Access to Finance Report published in 2018 by Finfind revealed that 61% of small business owners do not know their personal credit scores, yet this is one of the primary determinants of whether they will be able to secure finance for the business they own. It is crucial to check your personal credit score as a business owner, and to address any unpaid debts or to make arrangements with the credit provider concerned, so that this can be noted in your report.
Business credit data is still in a nascent form in South Africa. While consumer credit data is well organised and well-regulated with a standardised means of data collection and data sharing, this is not the case for business credit data. There is a lack of available credit data for businesses, and there is no regulation governing the collection and sharing of this data. Lenders are not obligated to share data on the businesses they have lent money to, as is the case for consumer lending. This means that credit bureaux have to purchase business credit data from lenders, which is why a business credit report costs much more than a consumer credit report does. The bureaux provide one free consumer credit report per year to allow individuals to check their credit score, this is not the case with business credit reports.
Typically, a bureau that collects business credit data will track the company’s credit obligations and their repayment histories (with both lenders and suppliers). Legal filings such as tax liens, judgments or bankruptcies in the name of the company are also tracked. This data, together with other information such as the length of time the company has been operating, the type of business and its size, are used to compute a commercial credit score.
This credit score is then used by lenders and other businesses to gauge the risk of lending money to the company or bringing them on board as a customer.
Whilst credit bureaux may use slightly different scoring models, in general, commercial credit scores range from 0 to 100, with 0 representing a high risk and 100 representing a low risk. The point is that, regardless of the method used to calculate the score, if the business pays its bills on time, doesn’t incur legal action against it and doesn’t have too much debt, it will have a good credit score.
Which factors are considered when calculating your business credit score?
It is important to note that the business credit records that are available from credit bureaux in South Africa, are primarily for larger companies who have previously secured loans. There is very little data available to be able to assess the credit worthiness of smaller businesses.
A business credit profile and credit score is based primarily on the following information:
- Information provided by banks and companies you trade with. Banks and many large companies have agreements with credit bureaux to provide information about how you manage your accounts. This information will detail the accounts the business has opened, when they were opened, the outstanding balances of each account and its payment history. The information is gathered at least monthly to ensure it is up to date.
- Company registration details available from CIPC. For example, a business credit report will also provide information about the company such as its address, its directors, the type of incorporation, its shareholders, the business size and in some cases, even the industry risk (although industry risk is something the credit bureau would compute).
- Public records on items such as liens, judgment and bankruptcies.
- Company information such as the ownership and subsidiaries, number of employees and sales.
What will a good business credit score mean for your organisation?
There are many circumstances in which lenders, suppliers or even customers might want to check the credit rating of a business.
The primary reasons for checking business credit records are:
- To assess the risk of lending money to your company – If your business needs to raise finance, then lenders will request a business credit score to help them assess the risk of lending money to your company. A good credit score indicates that lending money would be not be risky. If, however, the score is poor, then lenders are unlikely to approve your loan application, as there is a good chance that the company will not repay the loan or not be able to repay the loan due to an existing high debt/income ratio. If your company has outstanding litigation, lenders are unlikely to lend money to the company until the legal case has been settled and the financial implications of the litigation are clear. There are some lenders that are prepared to take higher risks, but this usually means that you pay a higher interest rate and must provide more collateral in return for the capital.
- To determine payment dates – It is common practice in many businesses to use supplier credit for critical suppliers. This means you receive the goods and only pay for these later. The supplier, however, would need to decide whether to give your company a 30-day payment term upon receiving a bulk order for supplies. Obviously, your supplier wants to know that he will be paid, particularly if he must deliver the goods to your company, and then wait 30 days for payment. Once again, a good credit score will mean that giving your company credit is not too risky, whilst a poor credit score means you would probably have to pay for the goods before they are shipped to your company.
- To determine whether to accept a work opportunity – If a company has been asked to provide services to a company that they have not done business with before, they may request a commercial credit score to help them assess the risk of non-payment of services delivered. A good score would mean that the potential customer has a good history of paying their bills and would therefore be a lucrative customer to acquire. However, a poor score would indicate that you could be at risk of providing services and then not receiving payment for them.
These examples show how critical it is to manage the business’ finances in a positive way to maintain a good credit score. Good scores mean that it is easier to raise capital, and you are likely to be able to negotiate better interest rates and repayment terms.
How can you improve your business credit score?
Since business credit scores are used to determine the credit worthiness of the business, it really pays to monitor your score and take actions that enhance the credit score. This will positively impact on the company’s ability to raise finance.
Know your credit score
The starting point is to know your current score. Unfortunately, unlike consumer credit reports which provide you with one free report per year, you will have to pay to see your business credit report. Bear in mind that if you are a new company or have only been trading for a couple of years, they may not have enough information on your company to provide a business credit score. What is of primary importance for all businesses, it to ensure that the owner’s credit report is in good standing.
Once you have seen your credit report, you will be able to see the information that is being used to compute the score. It is critical to check that the information is accurate, and if it isn’t, immediately contact the credit bureaux and provide them with the right information.
Pay your bills on time
A good payment history accounts for a large percentage of your credit score. So, make sure that you pay bills on time.
Check your credit utilisation
Credit records work out the percentage used of the total available credit. The higher this percentage, the more risk there is to approve new loans. In general, lenders consider a 15% utilisation to be a good ballpark. So, if you are maxing out your credit cards, consider reducing this debt to lower your utilisation rate. Another tactic is to consider raising your credit limit. By doing this (and not using the additional credit) you automatically decrease your utilisation rate.
If you have good relationships with your suppliers, consider opening supplier credit accounts, but do make sure that these accounts are paid on time. This will add to the range of positive data collected on your business and thereby improve your score.
Negative comments – defaults, judgements, liquidations, etc.
If you have lapsed payments, then sort these out as quickly as possible and then make sure that the credit bureaux adjusts their records accordingly. Liquidations, judgments and bankruptcies are regulated by law, so there is little you can do about these other than to check they are removed at the appropriate time.